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Federal Budget Rates a ‘B’

Canada’s small business owners got some good news when the 2013 federal budget was announced on March 21st. The document included several significant measures that will benefit entrepreneurs, including expansion of the lifetime capital gains exemption (LCGE) and its indexing to inflation, and extension of the Employment Insurance (EI) hiring credit for small businesses and its expansion to include companies with up to $15,000 in EI premiums.

Thanks to these measures, among others, Canadian Federation of Independent Business (CFIB) President Dan Kelly gave the budget a ‘B’.

“Overall, this is a good budget for small business. Federal Finance Minister (James) Flaherty has done a solid job by remaining on course to eliminate the deficit while announcing some important measures forCanada’s entrepreneurs.”

Kelly said CFIB was particularly pleased the government publicly acknowledged taking some of these measures – such as the expansion of the temporary hiring credit for small business – at the recommendation of CFIB’s 109,000 members.

The one-year extension of the credit will provide up to $1,000 against a company’s increase in its 2013 EI premiums over those paid in 2012; the measure applies to employers with total EI premiums of $15,000 or less in 2012.

“This is a big one for our members,” said Kelly, who noted that firms with payrolls of less than $550,000 qualify for the credit. “If you expand your payroll for any reason, you receive a $1,000 EI credit, even if you haven’t hired anyone. EI rates are going up modestly so this effectively negates the hike.”

The increase in the lifetime capital gains tax deduction from $750,000 to $800,000 will help small business owners when they’re ready to move on, he adds. And because it will be indexed to inflation, the exemption’s value will be protected in the future.

“That’s especially important because small business owners don’t have gold-plated pensions when they retire,” said Kelly. “Most plan to retire on the funds they receive from selling their businesses.”

The deduction applies to small businesses that primarily operate in Canada and have few investments or foreign holdings. According to KPMG EnterpriseTM, the increase could mean up to $12,000 in tax savings.

A less-pleasing development was the announced decrease in the federal dividend tax credit rate on non-eligible dividends to 11 per cent, down from 13.33 per cent. The change applies to non-eligible dividends paid after 2013.

“Until we know what changes the provinces will make to their dividend tax credits, we won’t know the combined federal and provincial tax rate on non-eligible dividends in 2014,” the budget document said.

In recent years, it has been more lucrative to take money out of a small business in the form of dividends than salaries or other means, said Kelly. “Now, the government has closed the loophole. We’re watching this closely and waiting to hear how it impacts our members’ firms. We’re concerned it will be poorly received.”

While CFIB expected the change, it would be much easier to accommodate if the small business tax rate had been reduced from its current 11 per cent, he noted.Ottawahas said it would look at further tax relief, including for small business owners, after the deficit is eliminated.

Kelly applauded the government’s focus on eliminating the deficit by 2015/2016 or earlier. “Small business people know that running deficits is dangerous because they may result in future taxes.”

The need for governments to balance their books was recently highlighted by a CFIB report titled Canada’s Fiscal Fitness. The report measures spending, revenues, and debt as a percentage of gross domestic product (GDP) for the federal government and all 10 provinces, and illustrates the negative impact that would result if governments were to miss their spending targets.

Other budget highlights that impact small business include:

• The Canada Jobs Grant

Given that half of Canada’s small firms are concerned with the shortage of qualified labour, CFIB is pleased the budget includes renewed focus on skills training. The budget also has plans for a jobs grant, which will see Ottawa provide matching funds of up to $5,000 per person for skills training programs. Employers and provincial governments will be expected to put in the rest. This approach is an improvement on funneling money through the provincial governments, which hasn’t worked well, said Kelly.

“Because details of the plan will have to be negotiated and approved by the provinces before it goes into effect, we’re taking a wait-and-see attitude. We will be lobbying to ensure the new Jobs Grant recognizes informal, on-the-job training and those elements of current training programs that are working well. But getting employers more involved in training is a step in the right direction.”

• Accelerated Capital Cost Allowance

The accelerated capital cost allowance for machinery and equipment has been extended for two years.

• Reducing Red Tape

Kelly lauded progress on reducing the red tape burden at the Canada Revenue Agency (CRA). “This has been a huge irritant for small business,” he said.

• Venture Capital Support

The budget contains some new venture capital support, including $60 million over five years, for startup accelerators and incubators. The government will give the Business Development Bank of Canada $100 million to invest in companies that complete those programs.